Trade between China and the U.S.
The U.S. runs a trade “deficit” with China.
- U.S. sends $$, China sends goods.
- Chinese government takes the dollars
from exporters in exchange for Yuan
(RMB), which is priced artificially low.
The value of the $$ artificially high, at
least against the Yuan.
The iPhone: “Made in China” What sense
is that when less than 4% of the revenue
goes there? Trade stats are weak, but still
clear that China dominates in US relations.
The total trade is less than is generally
believed. Federal Reserve Bank, SF, 2011; of the 2.7% of GDP in trade
with China, 1.2% is actually Made in China content.
Consequence?
China pays a premium for the $ to
encourage us to buy more—it forces
development in China (an implicit tax
on their citizens). How much?
1996: $100 B foreign assets
2001: $200 B foreign assets
2011: $3.2 T foreign assets (half $)
China and Japan Own More than
$1 Trillion U.S. Debt Each
Yield down from 5% to 1.5%
Where do the $$ go?
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Government of China invests heavily in
conservative assets, such as U.S.
Treasury bonds.
The U.S. runs big deficits, government
of China buys the U.S. debt, sending
back the $$ for goods bought in U.S.
Why not buy U.S. companies?
Politically not acceptable.
Revalue the Yuan?
Critics say China “manipulates” the Yuan. True,
and the Swiss manipulate the Franc and the
Japanese the Yen.
So what if the value of the Yuan is “too low”?
Double its value. In $ terms that means average
factory wages go from $300 per month to $600
a month. Oral-B toothbrush ($30) is “Made in
China” for $3 revenue in to China assembler.
Make that $6. So what?
Are those jobs coming back to America?
Maybe they go to Vietnam.
Where is the value?
Not in assembly work.
Consequence of China Policy
Undervalued RMB (tied to $) hurts free-floating
currency competitors—Japan, Korea, India
Undervalued RMB means Chinese households earn
less—subsidizing producers of exports.
Low interest rates in China also mean households
subsidize loans to borrowers in China.
Poor performing banks in China subsidized by
large spread between interest paid to savers
and interest charged to borrowers.
Thrift Pays: Up to a Point
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The people of China, who are poor, save
perhaps 20-30% of their income.
And the government saves foreign exchange
Effective savings rate nears 50%. Interest
rate paid is very low (subsidy to borrowers).
Forced economic development.
Life is better, but could be even better:
Domestic consumption should rise.
World Champion Savers: Capital
Formation Exceeds Consumption
What Does It Mean to Say
China Is a Socialist Country?
Will the Yuan Become a
World Currency?
Not Likely very soon
In China Savings exceeds Investment
Hence, a surplus of cash.
Suppose you have a lot of Yuan.
What do you do with it?
Good luck finding stable investments in
China. The currency not all that useful.
The Tension
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The average American worker “owes”
China about $11,000.
Chinese people know the government is
hoarding money that could be spent on
education, roads, pollution control, …
China will not subsidize U.S. deficits
forever (especially at $1 Trillion/yr.)
Is there a Solution? We may
have each other by the throat.
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What can China do? Dump the dollars?
They need US to keep millions working
in factories—cut that off and serious
economic and political problems.
Spend more at home? Managed growth.
Spend more in other countries? Power.
U.S. needs to get its fiscal house in
order. Stop endless deficits. Does any
political leader address that?